Item 4: Proposed structure of the working group and terms of reference

A number of organisations provided feedback regarding the draft Terms of Reference that were circulated at the last meeting.

The ATO highlighted a number of issues raised in the feedback:

attendance – a reminder to Members that they need to seek the approval of the Chair for a replacement to attend, and that replacements should come from the organisation represented, not the individual’s employer.

conflicts of interest:

timing – Members may declare any conflicts of interest as they arise – it is not necessary for members to pre-empt all conflicts at the start of a meeting.

disclosure – it isnot necessary for Members to disclose details of conflicts of interest. It is sufficient for a Member to excuse themselves from that particular discussion.

confidentiality:

we don’t propose to include an exhaustive list of situations in which Members can / can’t distribute papers provided via the Working Group

we expect Members to exercise a level of judgement in the distribution of materials, whilst being mindful of their obligation to the organisation they represent as a Member of the E&R Working Group

The ATO will attempt to distribute papers 5 working days prior to a meeting, and minutes, within 10 business days after a meeting.

We request that you review the updated Terms of Reference that were circulated, and any further comments be provided to the Secretariat by 21 August 2015.

Action item:Provide comments regarding the updated Terms of Reference by 21 August 2015.Responsibility: Members

Item 5: E&R Work Program

A Practice Statement (PSLA) regarding earn-outs as they apply to mining arrangements has been drafted and will shortly be issued for comment.

Regarding the question of 'what is an interest in mining right for Division 40?'

The ATO has already confirmed that beneficial interests can qualify, but questions sometimes arise about the application of the ‘hold’ table in section 40-40.

The ATO has been looking at joint-venture arrangements, and whether the way mining rights are dealt with may represent trust or contractual/agency relationships. We have been provided with some extracts from older agreements, but we expect the answer will depend on the facts and circumstances in any particular case. Notwithstanding, the ATO may be able to provide some guidance with factors that may be relevant in most cases.

Division 40 provisions regarding renewals and conversion of rights are not as flexible as are the corresponding CGT provisions.

A number of parties have made representations about this over time.

Notwithstanding the limitations, to date the ATO has been able to use other provisions (e.g. those relating to mergers and splits) to ensure acceptable outcomes, although cases may arise in the future where that may not be possible.

ATO will issue some general guidance on this, but to date we have been focussing on resolving existing cases.

Unenacted Division 40 technical corrections

ATO is working through the issues prioritised by the MCA and will release guidance for comment in the near future. This may be in the form of advice to staff (a practice statement) about how to handle these issues where they arise.

Practical compliance – Tax Navigation Initiative

The ATO considers this to be a major / high priority matter.

We have received feedback that this isn’t a high priority for taxpayers.

We have had one taxpayer who has expressed an interest, and we have been able to use intelligence from these discussions to help inform the practical compliance strategies under the TR 98/23 rewrite.

This concept is not restricted to LNG or a particular industry only.

We request any other taxpayers that are interested in pursuing this contact us.

Action item:Review the updated draft of the Energy & Resources Work Plan 2015 and provide feedback by 16 October 2015.Responsibility: Members

Action item:Members are asked to follow up with their constituency (where appropriate) to invite interested taxpayers to contact the ATO.Responsibility: Members

Item 6: Division 815 – safe harbours / APA process (PS LA 2015/4)

Transfer Pricing guidance

There has been an ongoing work program to develop formal guidance since the Transfer Pricing law change 2 years ago.

In parallel with this, the ATO is also actively looking at areas where the development of ‘practical safe harbours’ which provide practical certainty to taxpayers (recognising it is not possible for the Commissioner to waive application of the underlying statutory test).

The current tranche of practical safe harbours is being developed in consultation with the CTA and ICAA.

APA Program

Regarding the PS LA in relation to the APA program:

The APA program is an important part of the overall ATO program.

The intent of the new PSLA is to improve the APA process to the benefit of the ATO and taxpayers alike.

Country by Country reporting

Treasury has also released an exposure draft in respect of country by country reporting.

Item 7: Marketing and procurement hubs

The ATO is looking to undertake consultation regarding guidance in relation to marketing and procurement hubs. This paper is the first step in that consultation process.

The ‘flags’ section of the paper contains:

12 framing questions – For example: When profits in the hub are measured, can they be reconciled with reference to profit outcomes observed in similar independent entities?

Discussion of structures and functions of offshore hubs.

A table with ‘risk corridors’ – an explanation of what response you can expect from the ATO based on your risk assessment. For example, if a taxpayer falls within our low risk category, then they should not expect that compliance resources will be applied to reviewing their marketing hub.

The current version of the paper does not contain figures as to what is, for example, an acceptable commission rate or berry ratio.

The paper outlines principles, concepts and factors to be considered by taxpayers when preparing relevant transfer pricing documentation and evidencing the process undertaken. This will assist taxpayers to self-assess their risk profile and to assist with demonstrating that they have a reasonably arguable basis for determining that the transfer price is an arm’s length price.

In preparing this paper the ATO is not setting a ‘safe harbour’ for taxpayers. This is not permissible under the law.

The paper notes that having a commission rate outside the flags may be entirely appropriate.

With reference to the diagram on page 14, for taxpayers whose arrangements fall within the ‘green zone’, the ATO will be less likely to dedicate compliance resources investigating these arrangements.

These will still require some level of review to provide ATO with assurance, but these are likely to be less intense than would otherwise be applied.

Arrangements outside the green zone should prompt taxpayers to initiate discussions with the ATO.

The ATO won’t necessarily be looking to make adjustments for taxpayers with arrangements in the ‘yellow’ or ‘red’ zones.

However, the ATO will need to understand why taxpayer’s arrangements fall in those zones.

We have also considered that people may already have taken positions that are outside the green zone and may wish to engage with the ATO.

ATO has started to consider methods of dispute resolution or other methods if this is the case.

The ATO is seeking feedback as to whether this guidance is useful and does it actually inform taxpayers as to levels of risk?

This is targeted at people who are yet to interact with ATO or implement such arrangements.

Based on feedback received already it is likely that the paper will discuss inbound and outbound situations and cover a number of offshore arrangements and structures.

Action item:Advise the ATO if you are interested in participating in the consultation process regarding the marketing and procurement hubs guidance paper.Responsibility: Members / ATO

Item 8: Senate inquiry into tax avoidance

The hearing scheduled for 4 August 2015 was postponed.

There was a motion to have the Senate Inquiry extended to 30 November 2015.

The current focus is on hubs, but it has been flagged that there may be some interest in debt dumping.

In respect of comments regarding the disclosure of taxpayer information in a public forum, the ATO will not disclose individual information, as people must have confidence in the confidentiality of information provided to the ATO.

There are very stringent rules in respect of taxpayer secrecy.

The ATO has taken the position that if a taxpayer puts its own affairs on the public record those statements are incorrect, and that causes a lack of confidence in the system, then, as part of the Commissioner’s General Powers of Administration, the Commissioner will correct that information.

In respect of the Senate Inquiry, information must have been put on record by taxpayer, not another submission. Information will only be corrected if it misinformed the Senate, or was likely to mislead the Senate.

The Commissioner doesn’t propose to do a running commentary of people’s tax affairs.

We would prefer to keep comments to the exception, rather than making it part of normal processes.

Item 9: Effective Tax Borne

The Effective Tax Borne (ETB) methodology was undertaken in response to the Senate Inquiry and the ATO grappling with a way to deal with inconsistencies in the effective tax rates provided in submissions.

We released the ETB methodology to encourage broader discussion about the need for having a standardised approach to determine total tax paid on Australian linked profit on a like for like basis.

A second element of the ETB is that it helps the ATO to understand differences in risk between taxpayers, and it enables the ATO to review taxpayers in such a way that we can better assess structural drivers – as well as tax policy settings – using better comparisons across divergent types of businesses.

ETB starts with accounting data, and builds up, with the goal of understanding how global operations, as they relate to Australia, operate – with a key focus on what tax is paid in Australia as well as globally on those linked Australian business profits.

The ATO does not propose to publish this information. It formalises some of the internal risk work that the ATO is undertaking. In this regard we hope to use an ETB methodology to determine the intensity and level of compliance activity as well as evaluate the service offerings that should be made available.

The ATO is undertaking a pilot which provides the opportunity for a small sample of taxpayers to provide information, and trial and test the methodology.

The pilot will provide an opportunity for taxpayers to work with us to refine the ETB methodology, processes and methods to calculate an ETB, including data validation.

Issues that have been raised include:

Whether the ATO can collate information by other means, eg country by country reporting.

Elimination of related party interest expenses.

Allocation of third party costs incurred as part of the Australian linked business.

The calculation uses tax paid in the numerator and accounting profit in denominator.

It was noted that this will give rise to volatile results that will only normalise over the life of a project.

The reason the calculation focusses on tax paid is that at the Senate Inquiry the ATO was aware there were taxpayers that had paid no tax for a long period of time but reported high ETR.

The ATO needs to understand both tax expense, and tax paid, and understand why the 'gap' arises.

It is not intended that this calculation is completed with 100% accuracy – we’re just looking for a high level picture, and to understand the tax performance of the group.

It is not our intent to create additional requests for information or compliance costs.

The ATO recognises that it is most difficult for entities with fully integrated value chains with dealings with multiple related parties in different jurisdictions at each stage of the value chain.

Item 11: Exploration development incentive

Legislation has passed, and the first expenditure year ended on 30 June 2015.

The first reporting date is 30 September 2015.

AMEC is pleased to have worked with the ATO to co-design guidance and co-present at workshops nationally.

There are still a number of issues to deal with one of which is administration costs, and what types of costs can be included in the EDI claims.

AMEC wants to avoid abuse of the incentive, given this is a trial period, and the measure may be expanded in the future.

AMEC's preference was that no administration costs were to be included and that only direct greenfields exploration expenditure should be subject to the incentive. Although the EM explicitly states this the legislation is silent and so there is a view, as shared by TR 98/23, that an allocation may be appropriate.

Item 12: PRRT update

Deductible Expenditure

PRRT Regulations remake

Production licences reverting to retention leases

Deeps and Shallows

Action item:Circulate to the APPEA members, for their consideration and comment, a draft paper setting out our approach and the PRRT tax outcomes for the scenarios tested.Responsibility: ATO

Action item:Convene a further meeting with the APPEA members to discuss our approach, their views and proposals on how to proceed.Responsibility: ATO

Item 13: Leasing arrangements involving substantial equipment

The ATO is currently consulting regarding the tax implications of leasing arrangements involving substantial equipment.

Uncertainties have been identified regarding the tax characteristics, and structuring and pricing of mobile assets.

This mainly relates to leasing of vessels, but can include aircraft leasing.

We would like to get a better understanding of what is happening and provide guidance, if necessary, including appropriate examples.

We don’t propose to disturb previous work done in respect of withholding tax matters.

We understand that there are no withholding tax obligations for lease arrangements that are structured correctly.

It is the transfer pricing and PE attribution aspects which we’re mainly looking to provide clarity on.

Action item:Members to indicate whether they are interested in being involved in consultation in regards to substantial equipment leasing arrangements.Responsibility: Members

Item 14: Project pools consultation process

Industry has previously asked for consultation to take place regarding the project pool provisions in subdivision 40-I. While these provisions are subject to an existing ruling (TR 2005/4), the ruling doesn't directly address energy and resource companies and specifically excludes 'mining capital expenditure' and "transport capital expenditure". The purpose of the consultation is to address issues pertinent to such companies and provide an appropriate form of guidance.

We have started the consultation process by preparing a paper setting out current views as to how the provisions work and seeking input in relation to various issues. No specific feedback has been provided as yet.

Initial indications from industry bodies are that they don't see project pools as an area requiring immediate attention, and would prefer to begin consultation after other more pressing issues (such as exploration) are resolved.

Any expressions of interest to be involved in consultation can be provided via the Secretariat.

Action item:Members to indicate whether they are interested in being involved in consultation in regards to Project Pools.Responsibility: Members

Item 15: Section 6CA public ruling early consultation

Section 6CA of the ITAA 1936 provides that income derived by a non-resident that is calculated, in whole or in part, by reference to the value or quantity of natural resources produced and / or recovered in Australia has an Australian source.

Section 12-325 of Schedule 1 to the TAA 1953 imposes an obligation to withhold an amount from a natural resource payment made to a non-resident.

The income in question may also be subject to the Real Property Articles in Australia’s tax treaties.

Under section 12-330 of Schedule 1 to the TAA, an entity making a natural resource payment from which it is required to withhold must notify the Commissioner of the amount of the payment.

In turn the Commissioner is required to notify the entity of the amount to be withheld.

It may be difficult for an entity to determine whether a payment it makes to a non-resident is a natural resource payment and whether it is obliged to withhold an amount.

Further, when notifying the amount an entity is required to withhold, the Commissioner does not test the entity’s determination that it is a natural resource payment from which it is obliged to withhold.

Proposed ruling

The proposed taxation ruling is intended to provide industry participants with practical guidance to assist in determining whether a payment to a non-resident falls within the meaning of natural resource income and whether there is an obligation to withhold an amount.

This will include the interaction of these provisions with Australia’s tax treaties.

Early external consultation

The ATO is seeking views on the scope of section 6CA of the ITAA 1936 and section 12-325 of Schedule 1 to the TAA 1953 and the interaction of those sections with Australia’s tax treaties.

Feedback and input on what the ruling should address, interpretive issues encountered, practical examples in applying the provisions and the benefits in having a ruling on these issues will assist the ATO.

Action item: Provide feedback regarding the proposed ruling by 14 September 2015.Responsibility: Members

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